The rising M&A trend 0 comments

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Hardly a week passes by now without the papers reporting a mega-merger or major acquisition globally. We have in the oil industry, the much-discussed CNOOC bid for Unocal that was ultimately trumped by Chevron, and the probably successful acquisition of PetroKazakhstan by CNPC (with some competition from India's ONGC); in the shipping industry, the key one must be Maersk acquiring P&O Nedlloyd; in the consumer appliances industry, China's Hai-er sought to acquire Maytag but ultimately lost out to Whirlpool; while in the Internet realm we have had quite a number of mergers as the industry continues to consolidate, with Yahoo buying over Alibaba.com being the main talking point (see Return of the Internet stocks). And of course in Singapore we have just had the acquisition of Raffles Group's hotel assets by a US investment group. The above is just a cross-section of the increasingly buoyant global M&A activity.

To me, these M&As can be generally divided into two categories. The first is a global push by MNCs to cultivate new growth drivers by acquiring assets in "hot" regions (eg. Yahoo's acquisition of Alibaba to penetrate the China online auction market, PSA's acquisition of HK's port assets, Osim's purchase of Brookstone to enter the US market) or in synergistic industries (Whirlpool's acquisition of Maytag, BenQ's acquisition of Siemen's handphone division, TPV's acquisition of Philip's LCD TV division). Why do these companies buy when the economy is good and price tags are high? That's because the buying companies have themselves had good results as a result of the booming economy and their management might be finding it difficult to grow further organically; hence they look to stimulate growth through acquisitions. A case of Accounting 101, increasing efficiency of capital management (and hence return on equity).

The second is a relatively new phenomenon, that of the global push by rapidly developing China and increasingly, India, with strong support from their relative governments. This has been most prominent in the energy sphere where the country's strategic future is seen to be at stake. But increasingly, major Chinese companies with strong cash holdings and a solid domestic base have also been looking abroad for Western companies to purchase, likely for the strong brand equity associated with Western companies that will enable these China companies to grow their export markets. Hence it was that Hai-er sought to buy Maytag (owner of the Hoover brand) and Lenovo paid a ransom to buy IBM's computer division.

Who benefits from these M&A deals? The shareholders of the companies being purchased are usually big winners, however the individual investor is seldom so lucky to be invested in one of such companies. Less obvious beneficiaries would be those parties involved in the value chain lubricating the final transactions. Investment bankers and brokers who underwrite these deals will benefit from professional fees. Corporate secretarial services will be needed for the heavy administration work associated with M&As. And printers with exposure to the financial industry gain from all the documentation needed to be sent to the shareholders. A buoyant M&A scene often lends strength to a stock market but might also portend a peaking of the market as expectations and consequently valuations grow higher and higher. Hopefully it does not end up like 1999-2000, when tears followed the frantic acquisition of EMS companies like Omni Industries, JIT, Natsteel Electronics and Natsteel Broadway.